CFM17065 - Stock loans: legal form of stock loan

Stock loan contracts

The transfers under a stock lending agreement are not sales, but, despite their name, they are not loans. Full beneficial and legal ownership is transferred, so that if the borrower wishes it can on-lend the securities or sell them, purchasing replacement securities at a later date to fulfil its obligation to return equivalent securities when the stock loan matures.

Whilst the lender gives up legal and beneficial ownership of the underlying securities, it retains all the risks and benefits of movements in the price of the securities and will continue to recognise them in its accounts. If the borrower retains the securities it will have no such exposure since its obligation to return equivalent stock will cancel any gain or loss while the securities are in its possession. In practice the borrower may sell the securities in which case it will have a reverse exposure to that of the lender: if it sells high it may later be able to buy back low.